New Uganda Bank Lending Rates to affect old customers

If you have a loan in any bank, get ready to dig deeper into your pockets because the banks have increased their lending rates.

Standard Chartered Bank, which normally sets the pace in increasing rates, has announced that with effect from October 28, the interest rate on loans will rise from 23.5% to 28.5%.

“Following recent changes in the market environment, kindly note that our base lending rate will be adjusted for both new and existing customers,” the bank announced.

That means that if, for instance, you borrowed sh10m from Standard Chartered bank and were to repay sh14,029,490 after three years, you will now be required to pay an extra sh1m by the end of 36 months, instead of about sh14m.And if you took a loan from a different bank, you are not any safer.

Generally, banks have been increasing their interest rates from around 18% in June to 19% in July, 21% in September, 23% in October and now, for the case of Standard Chartered, 28.5% next month.

This is because Bank of Uganda (BoU) is tightening its money supply to fight inflation. And one of the tools it is using is to increase its prime lending rates. This is the lowest rate a commercial bank can charge its loan clients. Since June, banks have increased their interest rates four times.

BoU increased the rediscount rate and the bank rate – the lowest rates at which commercial banks can borrow from the Central Bank - to 25% and 26% respectively in the month of October, up from 21% and 22% last month.

Adam Mugume, the BoU executive director for research, said by making it harder to borrow, consumers will have less disposable income, bringing down prices and inflation within the next two or so years.

“We expect household consumption patterns to change. Locals will have to get feasible alternatives to expensive imports when credit to maintain their current lifestyle goes out of reach,” he explained.

However, when these rates increased, the bank was surprised to discover that the demand for credit by households still grew by 22% in the last month. That implied that there was still room for BoU to tighten the monetary policy. And whenever BoU tightens, other banks increase their lending rates.

Like any good businessman, commercial banks cannot lend out their monies at less than the cost at which they acquired the funds.

“Anytime the interest rate goes up, the risk of loan default definitely goes up. We are part of the economic cycle and we have to raise our rates to curtail credit growth. If we don’t, we will be contributing to inflation,” said Phillip Odera, the Stanbic Bank boss, at this year’s financial literacy week at the Serena Hotel.

A.R. Kalan, the Crane Bank managing director, said customers are gradually changing their deposit and loan application preferences to fit the changes in rates and the exchange rate.

“Banks are not shielded from the inflation, we also feel it. Most customers now prefer to deposit in US dollars since the currency is more stable,” he explained.

By Thursday evening, the shilling was trading at sh2,844.93 buying and 2,854.9 selling against the dollar. But it was higher at sh2,890 in the previous week with inflation at 28.3%.

BoU governor Emmanuel Mutebile said the increase in the central bank’s lending rates would strengthen the shilling through attracting investor dollars into the country.

When dollars enter the Ugandan market and quench the existing scarcity, the value of the shilling will improve. A stronger shilling would reduce prices of imported goods, thereby bringing down inflation.